ONS Economic Forum #ONSeconomy Website: involved/events/events/economic-forum/index.htmlhttp:// involved/events/events/economic-forum/index.html 8 October

Developments in price statistics Derek Bird, Head of Prices ONS Economic Forum: 8 October

Overview o Consumer prices o Business prices o House prices o Construction prices 3

Consumer prices o Governance o Owner Occupiers’ Housing costs update (CPIH impact) o Education fees, expected impact this year o Johnson review o International developments - OOH NA, scanner data (poss), compliance issues (poss) o Price quote collection contract update 4

Governance Smith Review, published in Feb 2014, recommended creation of two advisory panels to replace CPAC Advisory Panel on Consumer Prices (Stakeholder) Standing committee to advise the National Statistician on the uses and applications of price indices Chaired by an independent expert appointed through open competition Membership of the Panel (ideally 8-10) should reflect a wide range of user interests Advisory Panel on Consumer Prices (Technical) should provide advice on all technical aspects of price indices as requested by ONS and/or the Stakeholder Panel Chaired by ONS Executive Director for National Accounts and Economic Statistics (Nick Vaughan) Membership will be a small group (5-6) of experts in price index methodology and should preferably include some international experts 5

Owner Occupiers’ Housing costs in CPIH ONS and VOA have completed work looking into OOH component of CPIH Growth in private rents now more responsive to recession 70% of rent updates result in no price change Still at odds with HPI Impact on CPIH has an upper bound of 0.2 on 12 month growth rate 6

OOH - possible next steps Recalculate CPIH back to 2005 Introduce any changes as part of the annual update process (in March 2015) Low weight of private rents index (uses VOA data and affects CPI and RPI) means impact is not material, so no intention to revise in any aggregate Complete additional analyses into relationship between OOH and growth rates implied by estimates of average rental prices (official and market sector data providers) QA work and complete system documentation Explanatory article explaining the proposed changes to be published 7

Education fees Changes in university tuition fees have significant impact on inflation. Changes in fees for undergraduate courses in England introduced in a staged way: 2012/13 academic year, students beginning their studies could be charged up to a maximum fee of £9000 for first year courses (compared with a maximum of £3375 in 2011/12). Fees for other years stayed on the lower fee structure (max fees increased from £3375 to £3465). 2013/14, maximum fees for second year courses increased to the new fee structure, fees for first year courses were already at the higher level and fees for third and fourth year courses stayed at the lower level. 2014/15, maximum fees for third year courses are set to increase to the new structure 8

Education fees A simplified example using stylised data: 2011/122012/132013/142014/15 First year course Second year course Third year course

Education fees 10

Johnson Review Review of the range of consumer price statistics, led by Paul Johnson, Director of IFS The Review has been looking at: o The range of measures of inflation o The Cost of Living concept o Sources of data on prices and weights o Other statistical and measurement issues Due to report by end

International developments Current active development issues include the use of point of sales scanner data for price collection and expenditure weight aggregation, automatic collection of data from websites and improving collection methods for services such as flights and packages holidays Eurostat undertaking quinquennial review of the UK’s HICP (aka CPI) for compliance with regulations ONS working on one known area - the collection of prices across the month (ie temporal sampling) Other areas emerging from the compliance review will be considered alongside the recommendations from the Johnson review ONS will consult with users around any changes 12

Price quote collection contract New contract to collect consumer price quotes begins January 2015 TNS will deliver the service to collect prices in the field Change in technology improves: quality assurance process security of data meta data user functions (maps etc) 13

Business prices o ONS established a Deflator Improvement branch ahead of Barker/Ridgeway review o Barker/Ridgeway review endorsed ONS’s improvement programme for SPPIs and trade price indices o Recommended improvements to construction prices (currently produced by BIS) o Priorities for SPPI improvement set with respect to National Accounts requirements o Services Turnover Survey in train – results used to update industry structures and identify new ‘products’ 14

House prices o ONS has launched a consultation on the methodology for a definitive house price index - runs until 12 December o Approach agreed between ONS, Land Registry, Registers of Scotland and Land and Property Services, Northern Ireland o Aims to extend coverage to include cash sales and improve hedonic model with additional attributes o Trends in the UK housing market – article published 22 September 15

Construction prices Background What’s happened so far? Summary of proposed change Where will this show up in ONS outputs? Timescale 16

Background Construction output currently deflated using output prices created from lagged, weighted tender price indices, produced by BCIS under contract from BIS In 2013, BIS awarded the contract to Aecom in July 2013, who subcontracted back to BCIS while new methodology was developed 17

What’s happened so far? WhatDate Contract for production of construction prices indices was let to Aecom (formerly Davis Langdon). July 2013 BIS chaired a stakeholder meeting where the need to change the methodology was discussed. October 2013 Aecom presented proposal for input price and output price indices to ONS. Early June 2014 Presented proposed methodology and explanation of where construction price statistics were used in ONS outputs with BIS and Aecom at joint seminar. 19 June 2014 Consultation on proposed methodology.7 – 28 July 2014 Interim response published, does not provide detail of proposed methods. 15 September 2014 Refinement of proposed methodology.Ongoing 18

Proposed change Aecom have developed a new methodology for input costs, using a mixture of materials, labour and equipment. These will be converted to output costs using a market indicator. These data will cover time periods back to 2005, existing deflators linked on prior to then. 19

Outputs affected Output and new orders in the construction industry Output approach to measuring GDP (including preliminary estimate) Gross fixed capital formation (those elements relating to construction) 20

Timescale WhatDate Article on the proposed methodology and the impact that this will have on the data 14 November 2014 Output in the construction industry using new deflators for the first time, from January 2013 onwards 12 December 2014 New orders in the construction industry all time periods 12 December nd estimate of Q3 GDP from Q onwards23 December 2014 GDP prior to 2013 (quarterly national accounts consistent with Blue Book 2015) 30 June 2015 Output in the construction industry quarterly data 2005 – June 2015 Output in the construction industry monthly data10 July